Introduction
A balance sheet is a financial statement that shows how much money a company is operating with. It also shows how much property they posses in terms of assets and how much they owe in terms of liabilities to its creditors. This information is important to potential creditors, investors and employees of the company. A balance sheet also provides information that is educative to the public for decision making. Orit (2000), describes an income statement as a “financial statement that shows how the company is operating in terms of sales turn over , cost of sales and the expenditures used for running the year”( Orit ,4).
Businesses should continuously use the financial information to know how profitable they are running and how the money is being used for operations. Also companies that trade publicly need to produce financial reports on a regular basis. Private companies such as financial institutions have adopted the quarterly basis to report on the changes that have occurred in the year. The Microsoft incorporation posted total current liabilities worth $ 22,847 million in the 2011 financial period
Importance of information to potential creditors
Creditors are capital issuers to the company for its operation .Financial statements are quite important to all businesses as they are the real indication of the direction that the business is heading. Your balance sheet would indicate to the creditors how much they are supposed to lend to your company. Also the income statement would show whether you are making profits or losses in the long run.Profits and losses experienced would indicate what kind of decisions the company is making in repaying them. Creditors use balance sheet information to see whether you are able to finance your operations well to repay them in the required time and pay your debts.
Importance of information to investors
Potential investors and existing investors can use the financial information to judge the level of risk which the company is operating in. A large balance sheet would indicate that the company is experiencing a lot of activity which means it is experiencing some kind of growth. A small balance sheet shows that the company is experiencing slow growth and less activity.
Investors who are planning to invest in the company by buying shares have to look at both the balance sheet and the income statement to make their decisions. Investors need to look at the kind of activity the company is experiencing such as the level of liability and cash flows for the year. If the business has huge level of liability compared to the cash flows then it means it would not be a good decision to invest in the company. On the other hand if the company’s income statement shows it is experiencing high profits and the level of debt such as creditors and liabilities is low, it would be wise to invest in such a company since it is making money.
Importance of information to employees
The employees are the internal users of the company and it would be important to gain insight into what the company is made up of at that specific time. Employees such as the management use both the income statement and balance sheet to decide on what would be the best option to finance their operations during the year and coming years. An income statement would also show them the activities such as sales turnover, cost of sales and the expenditure the management used in acquiring cash flows. If the net profits are low, it would indicate that the company is experiencing a high level of expenditure and cost of sales. Therefore they should take relevant steps to return the company to profitability.
Reference
Orit, J.G (2000). Accounting Terms. Oxford, England: Oxford University Press.